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1 Information & Instructions: Letter explaining living trusts vs traditional wills & testamentary trusts 1. This letter may be sent to a client to assist him or her in determining whether to use a living trust or a will with a testamentary trust. Form: Letter explaining living trusts vs traditional wills & testamentary trusts [Date] ATTORNEY-CLIENT COMMUNICATION: AND ITS CONTENTS CONSTITUTE LEGALLY PRIVILEGED INFORMATION [Client s name] [Client s address] Regarding: Living Trusts in Texas Dear [Client salutation: The following discussion should answer some questions you may have regarding the pros and cons of using a living trust in Texas versus using a traditional will that contains a testamentary trust. WHAT IS A TRUST? A trust is a legal arrangement whereby property may be given by a donor or trustor to a trust for the use and benefit of another person known as the beneficiary. Trusts are useful for protecting and preserving property and in some instances in reducing tax liability. Trusts may be created and effective while the donor is alive or may take effect at the donor's death. The person who controls the trust property is known as the trustee. The trustee acts for in behalf of the beneficiary named in the trust document. A common trust, known as the revocable living trust, is used frequently by estate planners. It has some advantages and some disadvantages. A living trust is created while the donor is alive. A trust which is typically created in a donor's will and becomes effective upon the donor's death is known as a testamentary trust. The donor can also be both a beneficiary and the trustee. This means that a donor can have full control over all of the assets placed into the trust. Note there may be some tax considerations which would suggest some third person be named as the trustee, however you should discuss tax consequences of trust and estate planning with a qualified tax advisor such as a CPA (Certified Public Accountant) or tax / estate planning attorney. LIVING TRUSTS

2 A living trust is therefore a trust which is created during the donor's lifetime whereby property is placed into the trust for the use and benefit of the parties named in the trust agreement. The donor can be one of the beneficiaries named in the trust. In order to create a trust the donor transfers ownership of the assets that he or she would like to place in the trust from himself as an individual to a trustee, who will serve as trustee of the trust. Trusts should always be memorialized with a written document. Once the donor transfers money from himself to the trust, the assets are no longer in his or her personal name, this gives rise to the ability of a trust to reduce or avoid probate when a person dies. If all of a person's assets are in the name of a trust when a donor dies then obviously there is nothing to probate. In a living will the donor transfers his or her property to the trust, then the donor names a trustee. If the donor remains as trustee, then he or she maintains full control over all his or her assets which are contained in the trust. The donor can manage & use the property, including buying, selling, leasing, giving or spending as he or she sees fit. WHAT ARE SOME ADVANTAGES OF HAVING A LIVING TRUST? AVOIDING PROBATE The property placed in the living trust does not have to be probated. Those assets would be given directly to the beneficiaries pursuant to the terms of the trust agreement THUS AVOIDING the expense and delay of probating a will. One advantage of a living trust is therefore to avoid probate. In some states, the probate process is an extremely complicated, expensive and lengthy ordeal. Texas, as well as some other states, have a simplified and an inexpensive probate system, therefore a living trust may not be as desirable in Texas as compared to some other states. Since Texas has an efficient probate system, many Texas attorneys still prefer the use of a conventional will and having the will probated instead of setting up a living trust. One reason for this is that in Texas a person is allowed to name an Independent Executor who can probate the will and act without posting a bond and act without direct court supervision concerning the administration of the estate. The Independent administration without bond therefore reduces the cost of probate and simplifies the process. Once a will has been probated, the court issues Letters of Testamentary to the Independent Executor. That person may then administer the will pay the expenses and bills and then distribute the property without court approval or supervision. The executor is only required to file an inventory and an appraisement for the court which lists the assets in the estate as of the date of the person's death. Avoiding probate costs & expense can become a significant expense if the donor owns real property in more than one state. The use of a living trust can circumvent the need for probate proceedings in other states where property is owned. A probate in Texas generally will not

3 transfer title to real estate in other states to the heirs in a state other than Texas, therefore an ancillary or another probate is generally required to transfer property to the named beneficiaries when the property is owned in more than one state. Ancillary probates are supposed to be simpler and less complicated than a main probate, the difficulty and expense is that attorney's must be consulted in each state where property is owned and the ancillary probate procedures must be complied with; this generally requires paying a filing fee & obtaining an attorney to handle the ancillary probate. Consequently, in this situation, a living trust could avoid some probate expense. MORE FLEXIBILITY WITH A LIVING TRUST Anther benefit of a living trust is it's flexibility. The donor can select himself or any other person to be the trustee. The trustee then has full control over the assets in the trust as dictated by the terms of the trust. If the donor is the trustee he or she can change or alter the terms of the trust at anytime. The donor can revoke or cancel the trust at anytime, if he or she is the trustee. When the donor dies, the living trust, which actually is a revocable living trust states how and when the donor s property shall be distributed. Assets can be distributed to the beneficiaries in the time periods, amounts, and manner as stated in the trust document. For instance, the donor can specify that a certain amount of money should be used to finance children's or grandchildren's education. Likewise the donor could reserve or specify that moneys from the estate could be used for payment of medical expenses or special needs of his or her beneficiaries such as a disabled or handicapped children. PRIVACY The living trust document is generally not filed with the probate court, therefore it's terms are not open for inspection by the public. On the other hand a will must be filed with the probate court in order to be admitted to probate. It then becomes a public document. The will may then be inspected and reviewed as any other public document. Therefore, if you are interested in complete privacy, a living trust may be preferable to a will with a testamentary trust. AVOIDING GUARDIANSHIPS OR CONSERVATORSHIPS If a person becomes incapacitated before they die, the incapacitated person may not legally be able to handle his or her affairs. Accordingly a guardianship may be required in certain circumstances to handle the incapacitated person's financial affairs. If however, the incapacitated person's assets are in a trust, the trustee can continue managing the incapacitated person's affairs unless there is a provision in the trust agreement that requires special circumstances or revisions relating to the incapacity of the donor. Therefore, if you become unable to manage your affairs, and your property is in a trust, you may be able to avoid having a guardianship opened to manage your affairs. If the donor is the trustee, most trusts

4 provide for a successor trustee if the initial trustee becomes incapacitated. Consequently, in the event a donor that is a trustee becomes incapacitated instead of having to obtain a guardianship, the trust agreement generally provides for a successor trustee so that the trust is continued and a guardianship is not required. LITIGATION AND CONTEST Law books are full of suits where unhappy heirs have sought to contest deceased person s will. A will can be contested if it can be proved that the person writing the will, the testator, was unduly influenced to make gifts to one person or another or that some one in a position of trust benefited in the will by unduly influencing the testator. The unhappy relatives can argue that some other party inserted their desires in the testator s will due to their position of trust. Likewise the will can be contested if it can be proved that the testator was not of sound mind at the time he or she signed the will. The above relates to the lack of capacity or undue influence. Those questions must be decided by a jury if sufficient evidence has been obtained and a suit has been filed. It is much harder to contest the creation of a trust since the donor or person creating the trust generally has lived with benefits of the trust before his or her death in most situations. SECOND MARRIAGE SITUATIONS If the donor desires to insure that his or her separate property is protected upon marriage to a second spouse, a THIS trust can be useful in CUMENT allowing a property to retain its' separate character rather than being considered community property. A frequent request of people with estate planning concerns is their desire to have their property given to their spouse and at their spouse's death, their property given to their natural children. Many testators do not want the spouse to remarry and have all of his or her property given to the new spouse and his or her natural children be disinherited. Accordingly a trust can be very useful to preserve the testator's estate so that the natural children become the ultimate beneficiaries. Likewise, a trust can be useful to make sure that a business owned by a testator or donor remains with his family and stays with his children so in the event of a remarriage, it is not considered part of the community property estate in a subsequent marriage. NEED FOR A WILL EVEN IF YOU HAVE A TRUST Even if you have a living trust it still may be good idea TO HAVE a will. The reason is that a living trust may not be able to properly designate a guardian for minor children. Also you may leave assets out of the trust and thereby die intestate as to some of your assets. For instance you may inherit property after the time the living trust was created or you may have inadvertently left property out of living trust. Those assets then must be distributed by your will and if you have no will the property would then be distributed pursuant to the intestacy laws of your state.

5 Your will can leave your property to your living trust or specify the assets to be given in a manner different than the living trust. It is therefore a good idea to have a will even if you have a living trust. SOME FINAL CONSIDERATIONS Other considerations regarding living trusts are that there may must be some estate tax considerations which you should review with a qualified tax advisor before you enter in to a living trust. Trusts are generally more expensive to create and establish than a simple will, you must also transfer properties to the trust. In the case of real estate, deeds should be prepared, executed and filed, in the case of personal property bills of sale or assignments should be prepared. When you create a trust you must transfer stocks, bonds, bank accounts, etc., failure to effect the transfer may render the property outside the trust and therefore defeat the purpose for entering into the trust. Changing bank accounts, stocks, bonds, cars, real estate, etc. can require much work and be relatively expensive. There also may be additional record keeping and tax reporting that would have not been incurred but for the creation of a trust. CONCLUSION Living trusts can be very useful for the right circumstances. You should check with your attorney to see whether or not a living trust is for you. Many attorneys in Texas still recommend having a will with or without a trust rather than creating a living trust. On the other hand, you will find many attorneys who are strong advocates of living trusts (many advocate the use of a living trust with a by pass trust as a means to save on estate taxes). If you have any questions concerning durable powers of attorney, wills, trusts or probate, please call me at [Attorney s phone number]. Very truly yours, [Name of attorney]